3 Must-Know Rules Before Withdrawing From an Inherited IRA | Smart Change: Personal Finance

(Stefon Walters)

Opening an IRA is a fairly simple process — you can open most of them online with a few clicks. Unfortunately, the rules regarding an IRA you inherited are more complex and often confusing. The rules vary depending on the type of IRA you inherit and your relationship to the original account owner.

If you inherit an IRA, you’ll fall into one of three categories: spouse, non-spouse, or entity. Here are three must-know inherited IRA withdrawal rules, depending on the category in which you fall.

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1. Withdrawal rules are different for spouses

As a spouse, inheriting an IRA is simpler than if you were another type of beneficiary (like a child) or an entity (like a trust or charity). As a widow or widower, you have the option of simply switching the IRA into your own name.

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If you’re not a spouse, the best course is usually to retitle the account in both the deceased’s and your name. Doing so preserves the account’s tax-free or tax-deferred status. The title will have the deceased-person’s name and date of death and the widow/widower’s name. For example, “John Doe IRA (deceased January 10, 2022) for the benefit of Jane Doe, beneficiary.”

2. The five-year rule applies

If you’re inheriting a Roth IRA as a spouse, any funds can be withdrawn tax-free if the account has existed for at least five years. If it hasn’t, you’ll have to wait until that point for tax-free withdrawals. You can also roll an inherited Roth IRA into a new or existing Roth IRA if you don’t want to take money out of the account and would rather let it keep compounding.

If you’re a non-spouse beneficiary, you can’t retitle a Roth IRA into your own name, but you’ll have the option to transfer the funds into a new account or cash out the full amount in one lump sum. You can take withdrawals from the Roth IRA tax-free if the account has been open for at least five years.

3. The type of beneficiary you are matters

If you’re not the spouse of the person who passed away, you fall into one of two categories, and those determine your withdrawal rules. People considered as eligible designated beneficiaries include the following:

  • Minor children of the original account holder
  • Those who are permanently disabled
  • Those who are permanently ill
  • Those who are not more than 10 years younger than the original account holder

If you don’t meet the requirements to be considered an eligible designated beneficiary, you’re just considered a designated beneficiary. If the original account owner died after 2019, you must withdraw all the assets by the end of the 10th year after the account holder died. So if they passed away on January 10, 2022, you’d have to withdraw all assets by December 31, 2032.

If the original account holder was required to take an RMD the year they died but didn’t, an RMD must be taken from the account by December 31 of the year in which the original account holder died.

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